Singapore (December 12, 2024) – Asia Pacific macroeconomies and real estate markets are showing signs of potential structural changes and unique cyclical patterns, setting the region apart from global trends.
This is the thrust of the Asia Pacific chapter of ISA Outlook 2025 report just released by LaSalle Investment Management (“LaSalle”). Published every year since 1993, LaSalle’s ISA Outlook is designed to help the real estate industry navigate the year ahead.
This year’s key findings include:
Where favorable macroeconomic conditions present themselves and as global investment appetite returns, the diversity of Asia Pacific markets and sectors within the region will offer discerning investors a variety of opportunities with a wide range of risk-return profiles.
Five strategic themes are highlighted in the Asia Pacific ISA Outlook 2025:
The multi-family sector in Asia Pacific is undergoing structural changes, driven primarily by demographic shifts and government policies, with significant potential for institutionalization. This sector offers a range of investment opportunities in a basket of markets except China, although it would take time to fully unlock value in this nascent sector outside of Japan due to unproven liquidity.
Office market performance across Asia Pacific varies significantly. It is increasingly important to consider the timing of entry and exit as well as risk mitigation plans. South Korean, Japanese and Singaporean offices offer strategically selected investment opportunities for investors with different risk and return appetites.
The logistics sector shows dispersion in performance across markets, submarkets and sub-sectors. With relatively balanced supply-demand dynamics, Australia, Singapore and select Japanese markets offer investment opportunities, despite reducing return expectations.
We expect that well-managed retail assets that have adapted their tenant mixes and market positioning in response to changing consumption habits will outperform, adding to operational intensity. A granular, asset-level approach to investment is crucial, given the performance variations across markets and sub-sectors.
The Japanese hotel market is set to continue its growth trajectory, driven primarily by domestic demand and, to a lesser extent, inbound tourists. However, the performance is expected to vary across markets and segments, influenced by the operational capability to navigate challenges such as labor shortages and rising labor costs.
Looking ahead, investors in Asia Pacific real estate must navigate a complex environment marked by structural changes and atypical market cycles.
Elysia Tse, Asia Pacific Head of Research and Strategy at LaSalle, commented: “There are many unknowns in the current complex economic climate, compounded by impending changes in Trump 2.0, which will likely lead to periodic episodes of capital market volatility. Investment strategies that favor domestic tenant demand and domestic capital, as well as those that focus on operational intensity, such as deal execution and in-house leasing, are important for value creation and preservation. In the event of significant dislocation or capital market volatility, investors could seek attractive entry points or creative, structured solutions to address capital stack issues for some troubled property owners or developers.”
Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “As we enter 2025, we’re seeing the dawn of a new real estate cycle. While challenges remain, particularly in resolving legacy capital stack issues, we’re observing improving capital market conditions and emerging opportunities across a wide range of sectors and geographies. Investors who recognize these shifts early and act with flexibility are likely to benefit from attractive risk-adjusted returns. However, it’s crucial to remain vigilant about risks on the horizon and avoid the expectation of a rapid return to ultra-low interest rates.”
Ends
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
This article first appeared in the December 2024/January 2025 edition of PERE.
LaSalle’s Ryu Konishi and Julie Manning spoke to PERE about the growing importance of sustainability as part of investment decision-making and LaSalle’s approach to creating a global real estate net zero carbon pathway strategy.
A 360-degree approach to decarbonization
The importance of sustainability as part of investment decision-making in the real estate space has been on the rise for quite some time. In fact, the various physical risks associated with climate change, and the regulatory imperative of transitioning to net zero, are now so significant that these factors are gradually filtering through in the form of real-world valuation impacts.
For real estate investors, this raises both risks and opportunities. LaSalle Investment Management is one firm that was early to recognize this, having set up a global sustainability committee back in 2008. More recently, it has worked with the Urban Land Institute to develop a decision-making framework for assessing physical climate risk in relation to its real estate investments.
According to Julie Manning, global head of climate and carbon, and Ryu Konishi, fund manager of Lp3F (LaSalle’s global real estate net-zero strategy), this kind of approach to risk analysis – both broad and deep – is essential. So, where should investors start? And what might a determined decarbonization program in real estate look like?
Almost three years after interest rates began to spike leading into the Great Tightening Cycle, the first light of a new real estate cycle is clearly visible on the horizon. As with the start of every new day, however, opportunities and challenges lie ahead. LaSalle’s Research and Strategy team will examine both throughout the course of November and December, as we publish four separate chapters, one covering our global outlook, and three deep-dives covering the outlook for Europe, North America and Asia Pacific. Each chapter can be found alongside an accompanying video conversations with lead authors on the links below.
In the Global chapter of ISA Outlook 2025, we look at how to make the most of this new dawn and the opportunities it may present, but with a watchful eye on ways the new day could go off track. We examine these through four broad themes in this year’s report: the morning sky, the capital stack hangover, the breakfast menu, and the early bird.
We examine each of these concepts in turn, and ask what each means for real estate and they intersect with one another and other key trends.
Global Head of Research and Strategy
Managing Director, Global Research and Strategy
While dawn is universal, across Europe it can appear different from each location and every angle. European real estate is transiting inflection points following a deep capital market correction. The INREV ODCE index shifted in the latest quarter from declines to positive after seven down quarters.
Against this backdrop, we share our Impressions of a Rising Cycle in Europe, with a focus on what makes the region different from others across the globe. We also share our five key strategy themes for investors in European real estate for the year ahead.
Europe Head of Research and Strategy
Europe Head of Core and Core-plus Research and Strategy
Europe Head of Debt and Value-add Capital Research and Strategy
The summer and autumn of 2024 saw growing optimism among real estate investors. The belief that the dawn of 2025 would open with sunny skies for the real estate market was driven by falls in interest rates from peak levels, fading economic growth concerns and real estate valuations now more aligned with market transactions.
But with more uncertainty creeping into the picture in late 2024, especially around longer-term interest rates, what we see could be described as a “partly cloudy sunrise.”
Americas Head of Research and Strategy
Canada Head of Research and Strategy
The current real estate cycle in Asia Pacific is not a simple repetition of a typical cycle. While Asia Pacific economies have not been immune to supply chain disruptions and elevated inflation, interest rates and construction costs, real estate capital market liquidity in the region (with the exception of China and Hong Kong) has fared much better than in other parts of the world.
In our view, the varying and sometimes contrasting cyclical patterns among major real estate sectors within each country set the region apart from global trends.
Asia Pacific Head of Research and Strategy
Vice President, Strategist
China Head of Research and Strategy
Published every year since 1993, LaSalle’s annual ISA Outlook is designed to help our clients and partners navigate the year ahead. It brings together smart perspectives and investment ideas from our teams around the world, based on what we see across our more than 1,200 assets that span geographies, property types and risk profiles.
As always, we welcome your feedback. If you have any questions, comments or would like to learn more,
please get in touch by using our Contact Us page.
On November 19, 2024, LaSalle hosted a client webinar to discuss the outlook for listed real estate. LaSalle Global Solutions Chief Investment Officer Matt Sgrizzi offered a recap of our recent ISA Briefing: A new “golden era” for REITs and real estate? and took questions from clients in attendance.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in the November 2024 edition of IREI Americas (subscription required).
Senior real estate credit specialists from LaSalle discuss the rising significance of senior real estate mortgage credit in investment portfolios with Institutional Real Estate Investor. They explore its ability to provide steady income and downside protection, the growing role of alternative lenders, and the current market opportunity. The article examines how this strategy offers attractive risk-adjusted returns, portfolio diversification, and enhanced resilience in today’s dynamic economic environment.
Want to read more?
We regularly receive questions about past property market dislocations and what they might tell us about today, such as: Is office the new retail?, Will the 7+ years it took retail to rebalance be a template for office? and Should we be worried about the wave of supply in US apartments?
In our latest ISA Focus report, Rebalancing past and present, we engage in patten recognition across a range of historical episodes of occupier market challenges. We present a framework for how these imbalances tend to be resolved, and discuss the range of structural and cyclical factors that drive rebalancing. We also present a selection of historical case studies from around the world, highlighting the complex nature of the rebalancing process and how it can occur not only at different speeds, but also with “bumps in the road” for investors.
We conclude the report with a refresh of our ISA Focus: Revisiting the future of office, noting in particular that there will be specific investment opportunities that arise as the current rebalancing cycle plays out.
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in IREI Newsline.
As traditional lenders step back, the real estate debt market is opening up new avenues for institutional investors. In a recent Q&A with IREI, LaSalle’s Jen Wichmann, Senior Strategist and SVP of Research and Strategy, discusses the evolving landscape of real estate debt investments. From long-term trends and current market opportunities to the benefits of stable cash flow and downside protection, Wichmann provides insights into the sector.
One of the most important factors we consider when deciding where to invest capital is the transparency of a real estate market. This encompasses the transparency of market fundamentals and investment performance, as well as:
During times of heightened uncertainty, transparency is more important than ever as a foundation that allows real estate occupiers, investors and lenders to operate and make decisions with confidence.
Our latest ISA Focus report, Transparency and Strategy, explores these factors and their implications for real estate investors. We release this report alongside the Global Real Estate Transparency Index (GRETI) for 2024. GRETI is a joint publication between LaSalle and our parent company, JLL, which is based on a global survey of our extensive network of real estate market experts.
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
This article first appeared in the Fall 2024 edition of NAREIM Dialogues.
LaSalle’s Julie Manning writes about our latest report with ULI that provides an industry-wide framework for commercial real estate to address how physical climate risk data can be used in decision-making and supporting investment performance.
Using data to evaluate physical climate risk
Measuring physical climate risk is of growing importance to institutional real estate managers and their investors, at both the individual property and portfolio levels. Of the $850 billion of commercial real estate assets tracked by NPI, LaSalle estimates $285 billion, or 34%, is situated in high and medium-high climate risk zones in the US.
Increasingly, being able to assess an asset’s risk exposure, and knowing how to price that risk into management strategies, are essential parts of operating a portfolio. While data is key to this assessment, understanding how to leverage the right data is even more important. With so much climate risk data available in the market, how can organizations manage and find data that gives them manageable, impactful and usable insights? And more importantly, what should managers do with these insights?
Listed real estate investment trusts (REITs) have faced a tough two and a half years, driven by the rapid tightening of financial conditions (see LaSalle Macro Quarterly, or LMQ, pg. 13). Sentiment towards REITs has been weighed down not only by the higher interest rate environment, but also by constrained bank lending, a barrage of negative headlines about commercial real estate and REIT underperformance relative to the broader equity market. But, as the saying goes, it’s often darkest before the dawn.
The modern REIT period has seen three “golden eras” of REIT investing (see chart below).1 These have been characterized by either a dramatic growth in the REIT market or outsized investment returns versus other asset classes, or both. The Savings and Loan (S&L) crisis spurred what is often considered the birth of the modern REIT era in the mid-1990s. During this period, the number of REITs increased by nearly 50%, while the market cap of that group grew nearly seven-fold. Following the Dot-com bubble, a period where REITs had been significantly out of favor, the REIT market endured a multi-year run of strong absolute performance in which it cumulatively outperformed broader equity markets by more than 300%. The period following the Global Financial Crisis (GFC) saw the rise of dynamic new property sectors in the public market, and another period of outperformance in which REITs led broader equities by 50%.
While each golden era was unique, our analysis finds that each period was preceded by challenging circumstances with four common elements (see LMQ pg. 14). These are:
Recent history, marked by a post-pandemic recovery followed swiftly by the Great Tightening Cycle (GTC), presents important similarities to these historical periods of severe market challenges. For instance, real estate bank lending is dislocated. An AI-driven tech frenzy and fears of a generalized “commercial” real estate malaise mean REITs have underperformed compared to equities (see LMQ pg. 22). Meanwhile, signs of an easing or stabilization in financial conditions and a potential global monetary easing cycle are becoming more apparent (see LMQ pgs. 9, 10 and 30).
While history does not repeat itself, it does often rhyme. The presence of those elements in today’s market environment, and the potential for those concerns to flip to opportunities, may foretell the next REIT golden era. We discuss each of these factors in turn.
Challenged real estate lending represents an opportunity for REITs. The past two to three years have been characterized by a significant retrenchment in bank lending to real estate. According to the US Senior Loan Officer Survey (see LMQ pg. 16), the net balance between demand for loans and banks’ willingness to lend points to the widest undersupply of credit in the past ten years, except for during the depths of COVID-19. The shortage is evident in all styles of borrowing, from riskier construction loans to mortgages backed by traditional, defensive apartment assets.
This circumstance presents an opportunity for REITs given their strong financial positions and access to the capital markets. Having learned a painful lesson from the GFC, global REITs went into the GTC with their lowest leverage levels on record (see LMQ pg. 16), and nearly 90% of their debt on fixed rates and an average remaining term of seven years.2 Looking specifically at the US market, the overwhelming majority of REIT borrowing – nearly 80% – is from the unsecured market, at rates that are today almost 100 bps lower than a traditional mortgage. This relative advantage in both access and cost of capital positions REITs to potentially play the role of aggregator and to take market share.
“Commercial” real estate negativity is office-focused, but all real estate is not office. Headlines proclaiming the demise of commercial real estate usually involve a misleading generalization. Professionally managed, income-producing real estate generally should not be conflated with office specifically. It is well known that hybrid work and other factors have harmed office values. Office fundamentals are expected to remain relatively weak,3 with the sector’s growth outlook trailing nearly all other REITs globally. Office landlords will likely need to invest capital aggressively to maintain competitiveness.
These challenging office sector dynamics have unfairly cast a shadow over the broader real estate and REIT universe. In reality, office has over time become a smaller portion of the real estate landscape, especially in the public market; as of the date of this paper, only about 6% of global REITs by market capitalization are office focused (see LMQ pg. 20).4 The public market now offers a diverse sector menu comprising a wide range of dynamic sectors. These include industrial and logistics; forms of rental residential including multi- and single-family rental, manufactured housing and student housing; various formats of healthcare property; and exposure to tech-related real estate in the form of data centers and cell towers. Sectors other than office comprise the overwhelming majority of the public REIT market,5 and many of those sectors have growth outlooks that are forecast to produce earnings growth that is in line with or better than broader equities.6 That growth outlook is underpinned by a combination of secular demand drivers and declining supply levels, the other side of the higher interest rate coin.7
Media coverage naturally tends to focus on the national and trans-national arenas, but local political developments can be especially impactful for real estate investments. Such issues can fly under the radar, especially given many of the most relevant ones are only of interest to a specialist audience. For example, changes in policy around topics like the planning process, property taxes and transfer taxes (a.k.a. stamp duty) can have direct, measurable and immediate impacts on property cash flows and thus values. The distraction of the bright shiny lights of global geopolitics should not be allowed to excessively overshadow the critical local issues that impact real estate.
Underperformance may set the stage for a return to outperformance. The negativity around lending or financing concerns and the “death of office” have weighed on both the absolute and relative performance of REITs. The chart below shows the rolling one-year relative performance differential between REITs and equities; it indicates that REIT underperformance has reached its typical peak historical level before starting to reverse. Periods of underperformance have historically tended to reverse, and this instance is likely no different; indeed, the performance gap is already narrowing.
The start of a global monetary easing cycle. Real estate is a capital-intensive business that exhibits significant sensitivity to changes in financial conditions, an observation that holds for both directions of interest rate change. The downside of this dynamic was evident for much of 2022 and 2023, but the upside is likely coming into play. A global monetary easing cycle is now decidedly underway, heralded by the Fed’s 50 bps rate cut on September 18 (see LMQ pg. 31). REITs have generally performed well in periods leading up to and following a central bank easing cycle, as the chart below shows.
Over the past 25 years, REITs have produced total returns of 8% per annum, with 4-5 percentage points of that return coming from income. LaSalle’s base case underwriting for the next three years is for the REIT market to produce total returns of 9%, slightly above historical averages, with roughly four percentage points of that coming from income. That base case forecast incorporates today’s fundamental outlook and interest rate levels. Should any further easing in financial conditions occur, even only in the amount of 50 bps or 100 bps, those return expectations increase to 13% and 18% per annum, respectively, in line with previous “golden eras.”
Footnotes
1 This analysis based on LaSalle Securities analysis of historical macroeconomic, capital market and listed market trends. Source for the REIT performance data cited below are the FTSE Nareit indices.
2 Source for debt pricing comments in this paragraph: S&P Global Market Intelligence, Green Street Advisors, company financial releases, company research and market analysis conducted by LaSalle Securities.
3 There is considerable global variation in office performance, and there are certainly exceptions to this generalization, especially in select Asia-Pacific markets and the higher end of the European office quality spectrum. For more discussion of global office trends, see our ISA Outlook 2024 Mid-Year Update.
4 Source: LaSalle Securities. Percent of companies classified as office focused within the global listed universe defined as the constituents of the S&P Developed REIT, FTSE EPRA Nareit Developed and Nareit All Equity Indices. Sector classifications determined by LaSalle Securities.
5 As measured by market capitalization. Source: LaSalle Securities. Global listed universe defined by the constituents of the S&P Developed REIT, FTSE EPRA Nareit Developed and Nareit All Equity Indices. Sector classifications determined by LaSalle Securities.
6 As based on LaSalle Securities proprietary modelling and consensus earnings forecasts for the Bloomberg World Index, a proxy for broader equity markets.
7 Higher interest rates mean development proformas use higher exit yield assumptions and more expensive development finance. When interest rates are high, all else being equal, the rents required to justify development are higher.
8 Based on proprietary internal LaSalle Investment Management modeling of securities returns. There is no guarantee that such forecasted returns, or any other returns referred afterwards, will materialize.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
A prudent person sees trouble coming and ducks.
A simpleton walks in blindly and is clobbered.
— Proverbs 22:3
King Solomon’s words of wisdom have been passed down to us for 3,000 years. They still resonate, especially in this modern translation,1 even though the “trouble” is no longer invading Assyrians or Babylonians but the type of danger we bring on ourselves through an all-too-human combination of ingenuity, hubris and ignorance.
Watch any movie from the 1930s to the 1960s and you will see actors inhaling tobacco smoke with abandon. We know better now. Like the generational awareness of the harm caused by tobacco products, real estate owners have gradually become aware of the dangers lurking in certain building materials and contaminated soil. Starting in the 1960s, societies have spent fortunes cleaning up “miracle products.” Asbestos, PCBs, dry cleaning solvents, herbicides and lead pipes were all considered state-of-the-art technologies at various points in human history. None of these inventions were designed with the intention of killing people. They all started with a noble purpose – whether suppressing catastrophic fires, insulating transformers, cleaning wool suits or producing a pleasing nicotine buzz that also curbed the appetite. The “externalities” associated with societal damage from the use of these products took decades to discover and billions to eradicate.
Greenhouse gas emissions share a common ancestry with these miracle products. Heating buildings with diesel fuels, running gas lines through city streets, producing electricity with coal-fired plants—these were all logical, economical, and sensible solutions to the problem of bringing energy to homes, businesses and buildings of all types. The industrial revolution accelerated the growth of cities and raised the quality of life for millions of people by dragging them out of rural poverty. As we now know, society’s dependence on fossil fuels creates new problems which must be dealt with.
The recognition that miracle products can carry hidden (or not so hidden) dangers follows a predictable pattern. Here is what the step-by-step process often looks like:
Evidence and awareness. An environmental problem often requires decades of scientific study and mountains of evidence to convince people that a change is necessary. Even as this evidence accumulates, vested interests organize counterattacks to convince society that the problem is non-existent or over-stated. Eventually the harm to human life becomes so obvious that denial becomes a “fringe position.”
Market demand. In many cases, the process of partial “market adjustment” can begin ahead of government action. Voluntary data collection and industry-led reforms start the slow process of change. In the case of greenhouse gases, the marginal contribution of each emitter is so small, and so embedded in society, that government interventions sometimes lag market-led shifts (e.g., the adoption of LED lighting or heat pumps).
Regulatory response. Yet, government interventions are almost always needed to accelerate and complete behavioral change to truly eliminate harm to the environment and to human life created by “externalities.” These regulations and policy responses often get pushback as competing outcomes are debated in the political arena. Economists agree that putting a price on carbon would be the most efficient and effective solution, but a market mechanism for carbon pricing requires government intervention — in the form of a carbon “tax” or to set up an emissions trading scheme.
Benchmarks and best practices. Eventually, the rise of data benchmarks and peer group comparisons begins to shed light on who, where and how successful “treatments” are applied to any environmental problem. Engineering and laboratory science helps inform this stage of the process, as does public health or industry group data. Integration with market investment processes and decisions leads to a focus on reversing years of damage to the environment and compliance with new regulations and guidelines. At this stage, market-driven and regulatory-driven changes start to converge.
Price integration. Feedback loops are established where type 1 errors (false positives) and type 2 errors (false negative—or overlooked problems) are exposed.2 In loosely regulated situations like climate change, the efficient market hypothesis (EMH) takes hold as the change process gets partially or fully priced by consumers and producers. Economists and policy analysts favor the practice of placing a “price” on an externality to compensate society for the harm. In practice, though, compensatory payments to offset environmental damage are often decided through the courts and litigation.
Continued market and regulatory evolution. The enforcement of tighter regulations also follows its own trajectory depending on the governance structure of a particular country or urban jurisdiction and the toxicity of the problem. The discipline of epidemiology, using population data and public health analysis, is especially helpful at this stage of refining the policy solutions.
The Transition from “Data” to “Wisdom”
For the de-carbonization of buildings, various markets and countries are well into Step 3 (Regulatory Response) and Step 4 (Benchmarks and Best Practices). In Europe the “theory of change” is focused more on EU-wide or national policies to promote energy disclosures through top-down regulatory solutions. In the United States, the emphasis is based more on voluntary pledges, market solutions and regulations that are based on specific local jurisdictions. In most developed countries, steps 5 (Price Integration) and 6 (Market and Regulatory Evolution) are underway, but both have a long way to go.
The rise of real estate sustainability benchmarks (like GRESB) has accelerated in recent years. In many cases, they have expanded to include social factors and tenant well-being alongside environmental metrics. The next hurdle, though, is to establish materiality tests that infuse meaning, and determine financial impacts based on the volumes of reporting that the industry has started to produce and disclose.
Reading through ESG reports often reveals the triumph of reporting and public relations over salience or relevance. The conjoint challenges of reducing building emissions alongside improving the well-being of building users and the surrounding communities can be obscured by data denominated in less familiar metrics like tons of CO2 or Kilowatt hours. In time, and with experience, the emphasis will shift to what truly moves the needle on all elements of the “sustainable investing” paradigm—and which metrics give off misleading or meaningless “virtue” signals.
Financial metrics align most closely with the “fiduciary duty” of an investor. Moreover, stakeholders have decades of experience analyzing and interpreting financial data. It will take additional time and effort to convert environmental data into financial terms or to simply raise the consciousness of how to interpret energy and emission data in its own right. (LaSalle’s work on the “Value of Green” synthesizes studies of the evidence linking sustainability metrics and financial outcomes. An update on this work is below.)
In writing Proverbs, King Solomon gathered centuries of wisdom based on experience. In the modern world, we often believe that the steps to wisdom are built on a foundation of knowledge, information, and data. The famous “DIKW” hierarchy has been a mainstay of information sciences since the 1930s. Sustainability wisdom is still in the process of being formulated and likely requires more time to make progress. Fortunately, the foundations of this wisdom are already being put in place—first through data (the modern way to refer to many, many experiences), then information (organized and analyzed data), eventually leading to knowledge (patterns are identified and the “what” and “why” questions are answered) and finally reaching the status of accumulated wisdom (how to respond). This is a path that humans have traveled before. More lives are at stake this time around and the wisdom may not be easily agreed upon by all industries, countries and stakeholders. Nevertheless, the search for sustainability wisdom must continue and time is of the essence.
Revisiting LaSalle’s “Value of Green”
In September 2023, LaSalle published our ISA Focus report What is the value of green? Looking at the evidence linking sustainability and real estate outcomes. The report presents a framework on how sustainable attributes of properties can be viewed as both as drivers and protectors of value, along with showcasing findings from the broader literature. We continue to maintain a Value of Green tracker, monitoring research on this subject as it is produced. Some of the findings that have surfaced since the release of our initial report are worth highlighting:
Beyond the direct links between sustainability and historical investment performance in terms of return, rent and value premiums, more signals are emerging as available data on the topic grows, and becomes increasingly forward looking:
Beyond results based on backward-looking data, detailed case studies of investments into sustainable initiatives are being published. The JLL report “Future-Proof Your Investments“ showcased opportunities for sustainable New York offices; another example is CBRE’s report “The impact of on-site rooftop solar on logistics property values.”
Tobias Lindqvist
Strategist, Climate and Carbon Lead, London
Sources:
CBRE (March 2024) UK Sustainability Index Results to Q4 2023. CBRE
P. Torres, G. Bolino, P. Stepan (2024) The Green Tipping Point. JLL
T.Leahy (2022) London and Paris Offices: Green Premium Emerges. MSCI
P. Torres, J. del Alamo (July 2024) Future-proof your investments. JLL
D. Marina, J. Tromp, T. Vezyridis, O. Bruusgaard (July 2023) The impact of on-site rooftop solar PV on logistics property values. CBRE
O. Muir, Y. Chen, T. Metcalf et.al (Dec 2023) Green premium: Study of New York and London Real Estate finds strong evidence for a ‘green premium’. UBS
What can we learn from simulations?
The de-carbonization of buildings is taking place in a complex and ever-changing environment. It is a multi-dimensional problem replete with uncertain outcomes, regulatory change, shifting societal norms and markets, and the politicization of sensitive issues.
At the June 2024 MIT World Real Estate Forum, Professor Roberto Rigobon unveiled a “sustainability simulation” game patterned on his pathbreaking work on social preferences for the European Commission. The technique shows how the traditional economic conceit that we make “resource trade-offs” does not accurately capture how humans make decisions when faced with multi-dimensional choices.
In the simulation, the audience was given nine choices for different retrofit projects for a commercial building. Each choice resulted in simultaneous movement across three metrics that the audience had already established that they cared about — changes in NOI (profitability), CO2 emissions, and tenant satisfaction/well-being. The cost of the projects was amortized into the NOI calculations and the other metrics were also calibrated based on actual data from the US.
The simulation showed that a knowledgeable real estate audience rarely solves just for “pure profits” at the expense of tenant well-being or CO2 emissions. The simulation also mimicked reality—where sometimes profitability moves in synch with reduced CO2 emissions and other times it moves it moves in the opposite direction. The simulation was designed to show how the co-movement depends on the local market and the type of de-carbonization project. Tenant well-being and CO2 emissions could be implicitly linked to revenue when and if participants believe that occupancy, rents and capital raising are all interconnected.
Through their choices, the audience tried to optimize across all three priorities at once — leading to an interesting result that revealed their average willingness to “pay” to reduce a ton of CO2 emissions of about $200 ton. Yet, if asked directly how much they would pay to reduce a ton of greenhouse gas coming from a building, it seems unlikely that many would have volunteered to pay that much. This finding also shows how the language of profitability and returns is much more advanced than the metrics and concepts associated with either decarbonization or tenant satisfaction. And that all these metrics are linked, but not fully integrated in the minds of real estate professionals.
Only a few participants in the game focused only on reducing CO2 (at the expense of decent profits). And just a few focused exclusively on profitability at the expense of tenant satisfaction or CO2 emissions. This seems like a reasonable facsimile of what enlightened investors will do — especially when they know that their actions are being disclosed. As we learn more from these simulations, it is possible that policy makers will be able to refine the mix of incentives and regulations that govern the real estate industry.
Jacques Gordon
Cambridge, Massachusetts
LOOKING AHEAD >
Footnotes
1 The Message, translated from the Hebrew scriptures by Eugene Peterson (1993-2002).
2 These are all part of the learning that occurs with any “treatment hypothesis.” The science of public health provides solid evidence to weigh whether the “treatment” is helping, hurting or having no impact on the eradication of the underlying disease. In real estate, a good example of this is the gradual discovery that with certain types of asbestos, it is more dangerous to remove it than to “encapsulate” it in an existing structure. The science of “decarbonization” is still being established to determine whether, for example, the mass production of lithium batteries does as much harm as the burning of fossil fuels. For real estate and climate change, the “treatment” will likely focus on energy efficiency/ decarbonization interventions that are a combination of government penalties/incentives and voluntary actions. The effectiveness of these treatments will depend on compliance, market response, and how well interventions find acceptance through the political process.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Seoul (August 19, 2024) — LaSalle Investment Management Co., Ltd. (“LaSalle Korea”), on behalf of its Korea logistics investment joint venture with a Middle Eastern sovereign wealth fund (“the Joint Venture”) as well as LaSalle Asia Opportunity Fund VI (“the Fund”), has acquired two dry-only logistics facilities in Anseong within Greater Seoul with a combined gross floor area (GFA) of 385,946 square meters, at a purchase price of approximately US$450 million (or KRW5.3 million per pyung).
The two facilities are located next to each other and are built with modern warehouse specifications including spacious yards for its tenants and direct ramp access to each floor with leasable area efficiency of approximately 99%. The latter is a distinct feature for the facilities, compared to other similar sized warehouses designed with circular ramps which significantly reduces net leasable area.
This transaction follows the acquisition of two logistics facilities in Icheon made by LaSalle Korea last year, also on behalf of the Joint Venture and the Fund. LaSalle Korea also divested a separate cold storage warehouse project this year for KRW10.4 million per pyung after completing ground-up development and stabilizing leasing on the asset.
Steve Hyung Kim, Senior Managing Director and Head of Korea, commented: “The logistics sector continues to be one of the most dislocated property types requiring a high level of deal selectivity. LaSalle Korea’s recent acquisitions represent unique opportunities to invest in newly-built modern warehouses with full occupancy by institutional tenants, purchased at well below replacement costs. LaSalle Korea also plans to upgrade and implement new sustainability initiatives across these two investments which total over 4.15 million square feet in GFA.”
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About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages over US $87 billion of assets in private and public real estate equity and debt investments as of Q1 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Seoul (July 30, 2024) — LaSalle Investment Management Co., Ltd. (“LaSalle Korea”), on behalf of LaSalle Asia Opportunity Fund VI (“the Fund”) and a local co-investor, was awarded an office site in Seoul after submitting the winning bid in the 5th round of a non-performing loan (NPL) collateral auction. The winning bid price of approximately US$115 million represented a 33% discount to its appraised value. The land site is walking distance from Gangnam Station within the Gangnam Business District, with existing zoning to allow development of a new office with planned GFA of over 29,000 square meters. The project cost upon completion is estimated to be approximately US$245 million.
This acquisition marks the Fund’s second foray into the office market in Korea following a high-yield loan deal last year to bridge finance a 10-storey office project in Seoul’s Seongsu district. This collateralized loan was priced during a period of credit spread dislocation and was successfully repaid on its maturity date in December 2023, allowing the Fund to exit its first opportunistic debt investment in Asia Pacific.
Amongst key gateway city office markets globally, Seoul’s Gangnam office district continues to display post-pandemic resilience supported by both occupier demand and capital markets liquidity. According to JLL REIS and JLL Korea Research, as of Q1 2024, the office vacancy rate in Gangnam was 0.3%, the lowest compared to the two other business districts in Seoul with net effective rents also registering the highest year on year increase compared to the other business districts.
Steve Hyung Kim, Senior Managing Director and Head of Korea, commented: “Opportunistic investing in a higher cost of capital environment has forced us to be patient and also creative in how we source attractive entry points to our acquisitions. On behalf of our investors, we recently closed on recapitalizations, private off-market sales, and collateral acquisitions from NPL auctions like this recent transaction which capitalizes on both Gangnam’s strong office fundamentals, as well as a lowered project cost basis due to a legacy borrower and junior lender getting foreclosed. Larger sized office sites in Gangnam have retained scarcity value and this latest project from LaSalle Korea will introduce modern designs and sustainability initiatives to which we are very excited about.”
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About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages over US $87 billion of assets in private and public real estate equity and debt investments as of Q1 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information please visit www.lasalle.com and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
Joelle Chen joined LaSalle in 2024 and is responsible for defining LaSalle’s Asia Pacific sustainability strategy, leveraging technical capabilities and organizational best practices to drive sustainability performance.
She was formerly the Head of Sustainability Asia for Lendlease, delivering net zero investment roadmaps for its portfolio, and instrumental in reducing the embodied carbon of new developments through active supplier engagement to reduce cost impacts to projects. She was the first Asia Pacific Head for World Green Building Council and previously headed the Smart Sustainable Cities team at the Singapore Economic Development Board, driving public-private partnerships through innovation platforms.
Joelle graduated from the National University of Singapore with a Master of Architecture and a Master of Business Administration from the Singapore Management University.
Sustainability Associate, Continental Europe
Head of Sustainability, Americas
Senior Analyst, Asset Management
Head of Sustainability, Europe
Sustainability Analyst
Vice President, Global Sustainability
Head of Sustainability, LaSalle Global Solutions
European Net Zero Carbon Implementation Lead
Managing Director, Sustainable Investments
Strategist, Climate and Carbon Lead
Senior Portfolio Accountant
Global Head of Climate and Carbon
Associate Vice President, Sustainability
European Net Zero Carbon Lead
Director of ESG Investor Accounting and Finance
Sustainability Manager, Continental Europe
Net Zero Carbon Associate
Global Sustainability Associate
Sustainability Manager
ESG Manager, Asia Pacific
TE Capital Partners (“TE Capital”) and LaSalle Investment Management (“LaSalle”) jointly announced the sales launch of Visioncrest Orchard, a freehold Grade A commercial strata development located in the heart of Singapore’s prime Orchard Road precinct, with a combined office and retail area of 154,711 sqft (14,373 sqm). TE Capital is the operator for Visioncrest Orchard and the partners are accompanied in the joint venture by Metro Holdings as a capital partner of the TE Capital-managed vehicle.
As part of the launch, a 14,725 sqft office space on Level 6 and a 14,844 sqft office space on Level 9 have been released for sale at S$3,980 psf and S$4,130 psf respectively. Following VIP previews in June, a 14,725 sqft office space and several retail units spanning 1,388 sqft are currently under due diligence.
TE Capital and LaSalle attribute the strong demand for the LEED Gold certified, 11-storey freehold office to the allure of the Orchard submarket as well as the asset’s outstanding core qualities which have been boosted by substantial enhancements.
Located along Penang Road, Visioncrest Orchard offers easy walking access to Dhoby Ghaut and Somerset Mass Rapid Transit (MRT) stations, with direct access to three train lines (North-South, North-East and Circle lines). The Central Expressway (CTE) and Pan Island Expressway (PIE) expressways can be reached within a few minutes’ drive.
Situated just over 400 meters (437 yards) from Plaza Singapura and 550 meters (601 yards) from 313@Somerset, Visioncrest Orchard occupies a strategic position close to Orchard’s vibrant retail scene while being just a stone’s throw away from Singapore’s central business district. It is also nestled within the exclusive Oxley enclave and Istana, the official residence and office of the president of Singapore, providing a coveted address which combines prestige with cultural and historical significance.
Offices at Visioncrest Orchard boast greenery views through expansive full-glass, solar-protected windows with floor to floor heights reaching 4.3 meters. Large floorplates of approximately 14,500 sqft offer numerous possibilities for customization, while a generous provision of 135 onsite parking lots offer convenience for occupiers. Smart fittings that offer user-friendly building access via self-registration e-kiosks, as well as enhanced security through biometric features such as facial recognition are among the upgrades that occupiers can expect, while amenities such as a swimming pool, a well-equipped gym, a tennis court and other recreational facilities promote the integration of wellness with work.
In the years to come, Visioncrest Orchard is expected to benefit from commitments by the Singapore government to revitalize the Orchard district. Initiatives such as the Strategic Development Incentive (SDI) scheme will see the introduction of broadened urban planning parameters such as increased building heights, expanded gross floor area and more flexible land use permissions on older assets. Plans to pedestrianize parts of Orchard and redesign traffic flows will also contribute to the transformation of the area. As the availability of high-quality, high-specification freehold offices in the Orchard district will continue to be limited, the partners expect interest in Visioncrest Orchard to remain robust.
CBRE, ERA, JLL, Knight Frank, PropNex and Savills have been appointed as agents for Visioncrest Orchard.
About TE Capital Partners
TE Capital Partners is a uniquely positioned real estate investment and fund management firm, equipped with development management capabilities that focuses on APAC real estate markets. Established in 2019, TE Capital Partners is backed by the family office of Mr Teo Tong Lim, Group Managing Director of Tong Eng Group, a real estate company with a history of more than 80 years, having owned and developed close to 200 acres of land, comprising mixed-use, office, retail, landed housing and apartments.
As of Q4 2023, TE Capital Partners and its subsidiaries, has an AUM of more than S$3 billion across Singapore, Australia, Japan and the United States, and the Principals have developed more than S$3 billion of commercial office, residential and mixed development projects in Singapore in recent years, such as Solitaire on Cecil. Some commercial projects under management include 350 Queen Steet and 312 St Kilda Road in Melbourne, Australia. For more information, please visit www.tecapitalasia.com and LinkedIn.
NOTE: This press release may contain forward-looking statements by TE Capital Partners and should not be relied upon by readers and/or investors for any purposes. This is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. No representation or warranty express or implied is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or opinions contained in this press release. Actual performance, outcomes and results may differ from those expressed in forward-looking statements as a result of a number of risks, uncertainties and assumptions.
About LaSalle Investment Management | Investing Today. For Tomorrow.
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, we manage approximately US$87 billion of assets in private equity, debt and public real estate investments as of Q1 2024. The firm sponsors a complete range of investment vehicles including open- and closed-end funds, separate accounts and indirect investments. Our diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. For more information please visit www.lasalle.com and LinkedIn.
For more information, please visit www.lasalle.com, and LinkedIn.
NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.
What first drew me to LaSalle was its global reputation as a successful real estate investor. I knew the Australian team was a tight knit group with a strong track record, and they were known as a practical, on the ground investor focused on real estate fundamentals.
Prior to joining LaSalle, I worked with the Real Assets team at a global bank. In this role, I provided coverage for various private equity groups in infrastructure and real estate, covering renewables, oil and gas, public private infrastructure, mining, and transport sectors. LaSalle was a client of the bank and well known to me. My first direct interaction with the Australian and Asia Pacific team at LaSalle occurred in 2021 when they were in the process of acquiring an industrial asset in Sydney.
My role primarily involves securing external debt for acquisition and refinancing purposes, as well as assisting with direct real estate acquisitions in Australia on behalf of clients and LaSalle funds. Over the past year, I have also been involved in the development of new products in the Australian market.
Since joining, I have progressed from Associate to Manager last year, and more recently this year to Vice President. I’ve seen a large shift in the macro environment, notably higher interest rates, declining valuations, and a challenging capital markets outlook. This has placed pressure on capital stacks and one of my main responsibilities has been to manage these positions within the existing portfolio, working closely alongside Australian and APAC teams.
On the acquisitions front, although more subdued, the team has been actively reviewing and pursing predominantly opportunistic transactions across all sectors, but with a particular focus on industrial and living strategies.
What first drew me to LaSalle was its global reputation as a successful real estate investor. I knew the Australian team was a tight knit group with a strong track record, and they were known as a practical, on the ground investor focused on real estate fundamentals.
My favorite aspect of the job is that at its heart, LaSalle is an entrepreneurial business, and it needs to be. We need think creatively and be smart, but be prudent in finding ways to generate performance. We also need to have ‘an ear to the ground’ and in a position to act quickly and with conviction. LaSalle is structured in a way that fosters this environment. You get access to senior decision makers, and you are encouraged to present and progress ideas. I like that real estate is a people business, driven by relationships, track records and experience. I feel lucky to be part of a company that values these qualities.
I’ve also had the opportunity to represent LaSalle on the Property Council of Australia’s National Real Estate Capital Markets Committee, which has been a great experience.
I am grateful for the experience, responsibilities and exposure my role has given me so far. Regarding what’s next, it’s anyone’s guess, but I know LaSalle offers several exciting potential career paths. I see big opportunities for the business going forward and believe there is potential to make a real impact here.
I like all things outdoors. I’m a big sailor – it’s a fantastic tactical and competitive team sport that I enjoy on evenings and weekends when time permits! We are lucky in Australia, with natural beauty and Sydney Harbour on the doorstep.
“You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill… all I’m offering is the truth.”
– Morpheus to Neo, The Matrix (1999)
We published the global chapter of the ISA Outlook 2024 on November 14, 2023, just before euphoria about a potential ‘V’-shaped property market turnaround emerged. Interest rates fell quickly as financial markets priced in several US Federal Reserve (Fed) rate cuts in 2024. For a time, it looked as though our prediction that it would take a little longer for markets to digest a renewed spike in rates would not age well.
In this Mid-Year Update, however, we look back to find an outlook with an uncanny resemblance to that of six months ago. This is not because nothing has changed, but because the mood has gone full circle. The landscape remains characterized by interest rate volatility, soft fundamentals in some markets, and gaping quality divides, but also by pockets of considerable strength. Another factor that has not changed is that financial conditions (i.e., interest rates) remain the dominant driver of the market, and that political and geopolitical uncertainties are in focus in many countries (see LaSalle Macro Quarterly, or LMQ, pages 4-6).1
In this report, we discuss five themes we see driving real estate markets for the rest of 2024 and beyond. At our European Investor Summit in May, our colleague Dan Mahoney argued that—like Neo in the Matrix—we should take the red pill and endeavor to see the market as it is, not as we’d like it to be. Taking the red pill requires a realistic view on property values. It reveals as unlikely a return to an environment of ultra-low interest rates or uniformly benign fundamentals in the “winning” sectors.
But it does not mean that there will not be attractive investment opportunities. Unlike the bleak dystopia of The Matrix, there are many reasons for optimism, as well as signs that the coming months will come to be seen as a favorable investment vintage. That said, investing successfully will require a balance of big-picture perspective and granular discernment, and a mix of patience and willingness to take risk.
Over the past year, we likened the interest rate path in most markets to a strenuous mountain trek: the relentless climb (2022), the range-bound altitude of an alpine ridge line (H1 2023), the unexpected upward turn in the trail (Q3 2023), and the mountain meadow of cooling inflation and expected rate cuts (Q1 2024). More recently, there have been upward turns in the interest rates trail whenever there have been signs of sticky inflation in the US and other key countries.
One thing is for sure: No map exists for this trail. While interest rates have big consequences for real estate capital markets, they are extremely difficult to predict. We continue to caution investors against overconfidence in their ability to forecast the path of long-term interest rates.
Mercifully, falling rates are not a necessary condition for a robust recovery in real estate transaction activity. Despite interest rates remaining elevated, property markets are already showing signs of finding their footing, such as renewed US CMBS issuance and resilient deal volumes in many markets and sectors.2 A key reason for this is that wherever interest rates have spiked over the past two and half years, especially Europe and North America,3 real estate prices have by now adjusted downward significantly. The relativities between expected returns for real estate and those for other asset classes now look more appropriate than they have in many months; in other words, more of the market is at or near fair value.4
That said, while lower rates are not necessary for real estate capital market normalization, greater stability in rates than we have been seeing would no doubt help. Interest rate volatility is the enemy of a smoothly functioning private real estate transaction market. Excessive movement in borrowing costs during due diligence periods can lead to dropped deals and re-trades. Moreover, when rates are volatile, the conclusions of fair value models are also volatile, impacting both buyers’ and sellers’ assessments of appropriate pricing. Looking at recent trends in the MOVE index,5,6 interest rate volatility appears to be gradually easing but is still elevated relative to recent history (see LMQ page 13).
Increasing stability in rates is welcome, but for now it is reasonable to expect continued strains in real estate capital markets that create both challenges and opportunities. Such conditions can represent favorable entry points for debt investors (lenders), distressed equity players and core investors seeking entry points below replacement
Over the past half-year, interest rates have been increasingly influenced by widening divergences between near-term growth, inflation and monetary and fiscal policy outlooks. Most notably, the bond yield gap between the US and other markets, especially the eurozone, has widened. US growth and inflation have surprised on the upside, in the face of softening or stability elsewhere. Markets currently expect only one Fed rate cut in 2024, down from up to four earlier in the year.7 Meanwhile, in early June the Bank of Canada became the first G7 central bank to cut rates since the great tightening cycle began, with the European Central Bank (ECB) following shortly after (see LMQ page 7).
Regional groupings can obscure divergences within them. The key driver of eurozone softness is Germany (see LMQ page 23), owing to its reliance on manufacturing exports and past dependance on Russian energy. Meanwhile, the Spanish economy remains strong due to healthy consumption and tourism. Within North America, Canada’s economy is underperforming the US because the structure of its residential mortgage market makes it more exposed to higher rates.8 These intra-regional variations may have a range of impacts on property markets, for example by shifting the relative short-term prospects for demand and value.
Japan and China represent long-standing divergences that persist.9 In China, a loosening bias remains in effect as inflation hovers at around 0%.10 In Japan, monetary policy is gradually normalizing, but so far without triggering a big increase in interest rates (at least compared to elsewhere). In March, the Bank of Japan (BOJ) abandoned negative interest rates and ended most unorthodox monetary policies, though it has since held policy interest rates at around zero. Japan’s economy becoming more “normal” is generally a positive, but interest rate differentials have pushed the yen to a 34-year low against the US dollar (see LMQ page 14), creating upside risks to inflation.11 But notably, Japan remains the one major global market in which real estate leverage remains broadly accretive to going-in yields.
Aside from reinforcing the potential benefits of diversification, what do these divergences mean for investors? Mechanically, any unexpected relative softening of interest rates should, all else equal, be beneficial for relative value assessments of real estate in that market. But firmer rates in the US have predictably come alongside a stronger US dollar. This points to practical limits to global monetary policy divergences; central bankers are keenly aware that weaker currencies come with inflationary risks. Moreover, it is worth asking how persistent macro divergences will be; current divergences are rooted in timing differences of expected rate cuts, rather than an anticipated permanent disconnect.
For several years, secular themes and structural shocks have dominated the trajectories of global property markets. But there is a clear cyclical pattern reemerging in the form of a pronounced upswing in vacancy across global logistics markets, and in US apartments. The return of cyclicality in those favored sectors is having significant impacts on their near-term prospects.
The softening trend is not new. In the ISA Outlook 2024, we identified hot sectors “coming off the boil.” Part of this was down to normalizing demand levels, but elevated new supply was also a key driver. As expected, the softening we observed has continued to deepen, leading to outright rent declines in certain markets, especially for apartments in US sunbelt metros.
Softening fundamentals are not to be ignored, but we recommend investors to have the conviction to “ride the wave” of excess supply. Wide variation in supply levels at the market and submarket level means that investors with granular market data and the discipline to incorporate it into their market targeting processes should be positioned to select the most attractive markets and submarkets.
Moreover, the forces that create cycles sow the seeds of their own reversal; we expect the current supply wave to moderate soon, as evidenced by sharply falling construction starts (see LMQ page 25). Many of the projects being completed today broke ground when credible exit cap rate assumptions were several hundred basis points lower than today. Higher interest rates upended development economics; far fewer new developments can now be justified on today’s mix of land prices, construction costs and financial conditions.
Finally, investors should be prepared to think about cash flows in both real and nominal terms. When cooling nominal rental growth comes alongside cooling inflation, as it does today, it is possible for that to be consistent with solid real rental growth, depending on the relative magnitude of each.
Beyond the reassertion of supply cycles in some markets, there is an evolving mix of secular stories that deserve attention. Some of these are so long-standing that they could almost be considered constants. These include structural shortages of housing in most of Europe, Canada and Australia, as well as the widespread changing definition of core real estate in favor of more operational niche sectors and sub-types.12 We continue to be strong advocates for investment in undersupplied living sectors, and for participating in the institutionalization and growth of niche sub-sectors such as single-family rental (SFR) and industrial outdoor storage (IOS).
More dynamic themes that deserve a closer look include the stabilization of retail real estate and divergent office investment prospects:
Other key secular themes driving investment opportunities today include the implications of artificial intelligence (AI) adoption for data center demand, student mobility for student accommodation in Europe and Australia and aging for senior housing.
Past experience of real estate cycles suggests that the best investment opportunities tend to arise in periods marked by significant uncertainty, volatility and pessimism, but also when early signs of improvement and stabilization are present—in other words, moments similar to today’s environment. Experience also reinforces that it is nearly impossible to time the market, so it is best to be selectively active throughout the cycle. By the time the “all clear” signal is sounded after a market crisis, it is too late to achieve the best risk-adjusted returns.
That said, “red pill” thinking means we must recognize that the coming capital market rebound is unlikely to be as sharp as it was after the Global Financial Crisis (GFC), given that central banks are unlikely to usher in ultra-loose policy. Seeing the market as it is requires accepting the likelihood that interest rates could remain sticky, and a realistic view of near-term fundamentals as a wave of supply impacts some sectors.
Footnotes
1 Also see our ISA Briefing, “Elections everywhere, all at once: Geopolitics and risk”, April 2024. In that note, we highlighted the various sources of political uncertainty this year and outlined how we recommend investors consider these risks. At the time of writing, political developments are particularly salient for short-term movements markets in France and the UK, given elections that have been called in those countries.
2 Source: MSCI Real Capital Analytics and Trepp
3 Japan and China are key exceptions that we cover in greater depth under the “deciphering divergence” header.
4 Of course, there is considerable variation embedded in this and any assessment of fair value. As always, the devil is in the detail on the assumptions that go into expected and required returns; at LaSalle, specific fair value inputs and conclusions remain a proprietary output.
5 The Merrill Lynch Option Volatility Estimate (MOVE) is a market-implied measure of volatility in the market for US Treasuries. It calculates options prices to reflect the expectations of market participants on future volatility. Observation made as of June 24, 2024.
6 Source: Bloomberg as of June 26, 2024.
7 For more discussion of the Canada-US divergence and the consequences of mortgage rate resets, see our ISA Briefing, ”The impact of residential mortgage resets”.
8 For more detailed discussion of the unique factors in the Japanese and Chinese macro environment, see our ISA Briefing, “Key economic questions for China and Japan”.
9 Source: Oxford Economics; Gavekal Dragonomics as of June 26, 2024.
10 Economic theory suggest that weak currency may contribute to inflationary forces because it pushes up the cost of imported goods.
11 See our PREA Quarterly article on “The Changing Definition of Core Real Estate” for a discussion of how the characteristics considered desirable in core properties is moving from traditional metrics like lease length, to observed qualities like the stability of cash flows. This shift elevates the appeal of niche sectors sub-sectors versus traditional sectors such as conventional office.
12 See our ISA Focus report “Revisiting the future of office”, published March 2023.
Important notice and disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Over the last several years, we have seen an increase in the number of institutional investors around the world interested in adding real estate debt to their portfolios.1 In some instances, this is to replace an allocation to traditional fixed income, while in others it is both an enhancement and a way to further diversify their current level of real estate holdings.
Real estate debt versus traditional fixed income
Real estate debt differs from traditional fixed income investments in a variety of ways, primarily through collateralization, income generation, differing risk factors, the potential for securitization and its direct relationship to underlying real estate assets. In the same way that investors looking for reliable income streams and relative stability across a number of fixed income products such as government bonds or corporate credit, they can also turn to real estate debt investments.
One key differentiator for the asset class is that it is typically secured by tangible collateral in the form of real estate. Further, real estate credit investments benefit from attractive positions within a capital structure, benefitting from a subordinated first-loss position from equity, and also from negative control structures which give lenders an ability to proactively protect capital in a downside scenario. In contrast, traditional fixed income investments such as corporate or government bonds are usually unsecured and rely solely on the creditworthiness of the issuer.
For many institutional investors, income generation is a key objective and something that real estate debt investments can generate primarily through interest payments on the loan. These interest payments are often higher than on traditional fixed income investments such as sovereign or investment-grade corporate bonds. Additionally, real estate debt may also offer the potential for additional income through loan origination and exit fees, or in some instances, profit participation. Like other investments in any asset class, real estate assets are subject to market fluctuations and economic cycles. There are, however, additional property-specific risks that investors should take into consideration. These include factors such as underlying occupancy and cash-flow drivers as well as capital markets. Investors should also consider the wider macroeconomic and credit-risk considerations that investors in listed fixed income must factor into their decision making. Lending against property embeds the possibility of active takeovers, also known as workouts, requiring hands-on asset management expertise.
In some instances, real estate debt can be securitized, meaning loans are packaged together and sold as securities in the market. This allows investors to gain exposure to real estate debt through mortgage-backed securities (MBS) or collateralized debt obligations (CDOs). Traditional fixed income investments, on the other hand, are typically traded as individual bonds or included in bond funds.
Lastly, real estate debt investments are directly tied to specific properties or real estate platforms. The performance of the underlying property and its cash flows can impact the value of the debt, along with a borrower’s ability to repay it. Traditional fixed income investments are generally linked to the creditworthiness and financial health of the issuer, without a direct connection to specific underlying assets.
So why should institutional investors consider real estate debt?
As with any other asset class, real estate debt has its own unique set of attributes which, as part of a diversified, risk-adjusted portfolio, may provide investors with compelling reasons to include it within their overall strategy.
Key benefits may include:
As always, it’s important that real estate debt, like any other asset class, is considered as a component part of an overall portfolio of investments constructed with the underlying objectives of the investor in mind. When properly integrated into a portfolio, real estate debt investments have the potential to offer institutional investors the opportunity to generate stable income, diversify their portfolios, align their investments with long-term liabilities, protect against inflation, target attractive risk-adjusted returns and, in some cases, adhere to regulatory requirements.
Understanding the capital structure
The term “capital structure” in real estate investment is used to represent layers of debt and equity within an investment structure, each with its own risk-return profile and repayment priority. Investors choose a position in the structure based on risk appetite, desired returns and level of control or ownership in the investment. LaSalle invests across all layers of the capital structure.
Common equity represents an ownership stake of the property. These investors bear the highest risk but also have the potential for the highest returns. They participate in the property’s cash flows and profit distributions only after others have been paid. They have the greatest exposure to the property’s performance and value appreciation but also face the greatest risk during market downturns or property underperformance.
Preferred equity represents a hybrid investment between debt and equity. These investors provide capital to the project but have a higher claim on profits and cash flows than common equity holders. They enjoy a priority in distribution but still hold a subordinate position to debt holders. They often receive a fixed return, similar to interest on debt, and may also have upside potential linked to a property’s appreciation in value.
Mezzanine debt sits between senior debt and equity in the capital structure. Mezzanine lenders provide loans that have secondary priority in terms of repayment but carry a higher risk profile compared to senior debt. As a result, they tend to offer higher interest rates or additional equity-like features to compensate for the increased risk.
Senior debt occupies the most senior position in the capital structure and has the highest priority for repayment in case of default or enforcement. Lenders providing senior loans hold the first lien on the property, meaning they have the first claim to cash flows and proceeds in the event of liquidation and are usually secured by asset level security. Typically, senior debt offers lower yields compared to other subordinated positions within the capital structure due to its lower risk profile.
1 INREV Investment Intentions Survey, 2017 – 2024
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment. LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management. GL001731MAY25
Isabelle Brennan rejoined LaSalle as a Senior Managing Director in 2024, having previously worked within the Investor Relations team between 2015 and 2017. As Product Specialist – Credit and Global Solutions, she works with clients on a global basis to drive capital raising efforts in these verticals, as well as ensuring that LaSalle’s strategies meet investor needs. She is a member of the Investor Relations Management Board.
Prior to joining LaSalle, Isabelle held similar roles across the Credit and Indirect platforms at CBRE IM and M&G Investments, with responsibility for capital raising and investor relations across these channels globally. Earlier in her career, Isabelle worked within the Indirect and Fund of Funds Investment teams at Henderson Global Investors, now Nuveen (EMEA) and Prupim, now M&G Real Estate (Global), underwriting, investing and managing multi-manager investments on behalf of global clients.
Isabelle received her Bachelor’s degree from Monash University, Melbourne, and holds an Master of Science in Real Estate from Cass Business School, London. She also holds UK qualifications in Psychology and Law. She is active across industry organizations, sitting on the INREV debt working group, and as Treasurer of the Cambridge Land Economy Advisory Board (CLEAB).
Managing Director, Investor Relations
Head of Investor Relations, Americas
Head of Global Direct Investments
Managing Director, Investor Relations
Global Head of Investor Relations
Managing Director, Investor Relations
Managing Director, Investor Relations
Head of Americas Investor and Consultant Relations
Managing Director, Investor Relations
Vice President, Investor Relations
Senior Vice President, Investor Relations
Head of Investor Relations, Asia Pacific
Senior Vice President, Investor Relations
Senior Vice President, Investor Relations
Managing Director, Investor Relations
Senior Vice President, Investor Relations
Vice President, Investor Relations
Head of Investor Relations, Japan
Vice President, Investor Relations
This article first appeared in the May 2024 edition of PERE
Kunihiko Okumura, LaSalle’s Japan CEO and Co-Chief Investment Officer for Asia Pacific, speaks with PERE about why Japan continues to be an attractive market.
Looking up: Investors stay positive at the end of an era
The return of steady inflation to Japan will put pressure on asset management skills, but there are opportunities across the board, says LaSalle’s Kunihiko Okumura
In an interview with PERE for its 2024 Japan report, Kunihiko Okumura, LaSalle’s Japan CEO and Co-CIO for Asia Pacific, shared his outlook on the market, including the impact of Japan’s interest rate hike and opportunities across various sectors such as office, multifamily and logistics.
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Recognition has grown substantially in recent years that climate risk can shape real estate investment outcomes. This owes to an increasing frequency and severity of loss events,1 surging insurance premiums,2 improving data availability and a mounting reporting burden driven by regulations.3 Investors have had to move quickly from acquiring basic climate risk literacy, to sourcing good quality climate risk data, to most recently, leveraging that data into improved investment decisions. There is a clear and rising likelihood that investors on the lagging edge of this process may underperform.
At LaSalle, we have sought to share insights from our own climate risk journey, combining that with broader analysis of our industry’s climate risk challenges and opportunities. In 2022, we partnered with the Urban Land Institute (ULI) on a report, How to choose, use, and better understand climate-risk analytics, which addressed the difficulties in selecting and evaluating climate data from an ever-changing and increasingly crowded—and sometimes contradictory—data provider landscape. In April, we released a new report with ULI, Physical Climate Risks and Underwriting Practices in Assets in Portfolios, which looks at how investors are taking these data and seeking to make better-informed buying, selling and portfolio construction decisions based on them.
While the joint ULI report takes an industry-wide view, this ISA Briefing looks at the topic through the lens of LaSalle’s own investment process. We present three case studies of our evaluation of climate risk on a regional, market and asset-level scale. These examples – one each from each of our global investment regions – illuminate how we are taking account of climate risk and lay out our views on issues investors should be thinking about.
In 2023, the US recorded 28 weather/climate disaster events for which losses exceeded $1 billion, the highest recorded number of distinct events exceeding that threshold.4 But of course, these events were not uniformly distributed across the country. To better understand the geographic predisposition of parts of the country to these hazards, LaSalle’s US Research and Strategy team developed two separate climate risk indexes, evaluating current and future climate risk. The indexes encompass a range of climate hazards, such as heatwaves, floods and wildfires, with earthquakes added as a non-climate threat. The current climate risk index harnesses machine learning to scrutinize hyper-local data from the Federal Emergency Management Agency (FEMA). Meanwhile, the future climate risk projections rely on data from the Rhodium Group data set, as analyzed by ProPublica and assuming an RCP 8.5 scenario.5
Looking at climate risk at a regional scale has been useful in several ways. First, it can accelerate analysis of new opportunities by acting as a “yellow flag,” directing resources early in the underwriting process toward deeper analysis into asset-specific climate risk issues that may turn out to be red flags. Second, regional climate risk can be integrated into market-targeting tools, weighing it alongside other factors that influence real estate performance (for example, demographic variables such as population growth and real estate variables like the prospects for rental growth). To this end, LaSalle has embedded these climate risks scores into our proprietary Target Market Analyses (TMAs). Thirdly, it can help frame inquiry into how metro-level performance factors, such as migration patterns, can interact with climate risk over time.
On that last point, the map appears to beg a question about recent migration trends that have favored the Sunbelt.6 Are people disproportionally moving to at-risk places, and if so, why? An important follow-on question that is germane for investment strategy is whether climate change may eventually cause a reversal of recently observed migration patterns. Indeed, we do observe a discernible, moderately positive correlation7 (+29%) between climate risk exposure and increased migration over the past five years. This pattern holds, and even intensifies, when considering population growth projections for the next five years (+47% correlation).8
The implication is that regions facing severe climate challenges continue to draw new residents. This suggests that environmental risks may not yet be so widely recognized as to shape behavior. That said, a mere 8% of market value within the NCREIF Property Index’s (NPI) apartment asset base is situated in markets we classify as high-risk.9 This suggests the impact in the near-term on institutional real estate investors will be limited, at least until climate change is severe enough to routinely impact markets in the next less risky band, which encompasses 16% of total NPI apartment value.10 Either way, investors looking to the long-term would be wise to consider how people will respond to growing climate hazards in high-risk markets. If a major reaction is that Sunbelt denizens relocate back to the Rustbelt, that could have significant implications for regional economic growth and real estate market prospects.
Below the regional level, it is at the scale of an individual metro area where different degrees of exposure to climate risk can be evaluated with more granularity. It is often at this level where both in-place and planned efforts to mitigate the potential impacts of climate hazards can be identified. As we discussed in our 2022 ULI report, such measures can confound traditional climate risk data if they ignore its impact.
For example, when overlaying LaSalle’s global portfolio with raw data from our climate risk providers, Amsterdam and its broader ‘Randstad’ region stand out as especially exposed to sea-level rise. Not considering any protective infrastructure, we estimate that 52% of Amsterdam and 38% of Rotterdam commercial property would have a significant exposure to severe flood.11
Thankfully, the Dutch have been building dams and levees to protect their low landmass from flooding for centuries.12 Modern infrastructure investment accelerated in the wake of the 1953 North Sea flood – a combination of a severe European windstorm and high spring tide that caused the sea to flood land up to 5.6 meters above mean sea level.13 The ‘Deltawerken’ (Delta Works), now complete, consists of a set of storm surge barriers, locks and dams mainly located in the south of the country. But the Dutch flood defense program extends beyond the Delta Works,14 encompassing almost 1,500 constructed barriers, including more than 20,000 kilometers of dikes, enough to encircle the country over 15 times. In fact, the Delta Works program has evolved into the Delta Programme, a continuous project that take future effects of climate change into account, with a target of 100% of the Dutch population protected by floods not exceeding a 1 in 100,000-year event by 2050.15
The presence of these flood defense programs is of imperative importance when considering the Dutch markets for investments. We find that many climate risk data providers do not adjust for the Netherlands’ formidable stock of anti-flood infrastructure investment which mitigates much of the risk. Investors who act as uncritical “takers” of unadjusted climate risk stats may thus excessively underweight the Dutch market.
Below the regional and market level, the asset level is where the outcomes of climate hazards have the most direct impact on a building’s structural integrity or the ability to access and operate a property. An asset manager’s actions can directly influence a building’s capacity to withstand climate-related hazards. This tends to be the most impactful when such interventions are made during the design phase of the development.
For example, take the case of a LaSalle logistics development in Osaka, Japan, a city that has historically been vulnerable to flooding due to its geographical location, with much of the urban area made up of flat lowlands that make natural drainage a challenge in the event of tsunamis and heavy rainfall.16 The local city planning assesses the maximum level water could rise above sea level by submarket in the event of a flood. The flood height varies by location while considering additional factors such as the city’s infrastructure (i.e., floodgates and seawalls) and the overall elevation of the submarket. In the case of one of LaSalle’s Osaka Bay logistics developments, the subject warehouse is at a site where water levels could rise to three meters above sea level in the case of a flood.17
Seawalls, ranging in height from 5.7-7.2 meters protect the asset from extreme floods coming from the sea. To further mitigate the flood risk in the case of extreme rainfall or failure of the sea walls, the warehouse is designed with an elevated floor plate that puts the ground level 1.4 meters above mean sea level, and places key building equipment on the second floor, minimizing potential damage to the asset in the event of flood. This effort resulted in a 4.4 meter clearance above sea level (i.e., sea level + 1.4 meter buffer + 3 meters = 4.4 meters), which is above the required 3.5 meters above sea level (i.e., sea level + 1.4 meter buffer + 2.05 meters = 3.45 meters) for the location. In addition, the property management team has been trained and equipped to minimize flood damage on the first floor by closing the doors and shutters and placing sandbags in any gaps. By incorporating considerations to mitigate flood risk when designing the warehouse, the asset is well positioned to support tenants’ business continuity plans in the event of a flood.
Footnotes
1 Source: National Centres for Environmental Information of the National Oceanic and Atmospheric Administration (NOAA). See Billion Dollar Weather and Climate Disasters
2 Source: The Climbing Costs to Insure US Commercial Real Estate, MSCI, November, 29 2023
3 The TCFD framework which has now been absorbed by IFRS’ ISSB, serves as the framework with which other international reporting standards setters seek to align such as the US SEC who voted in favour of The enhancement and standardization of climate-related disclosure, or the UK Government and the Sustainability Standards Board of Japan who will align its disclosure standards with ISSB.
4 According to the National Centers for Environment Information (NCEI). $1 billion threshold adjusted for inflation in historical periods. See https://www.ncei.noaa.gov/access/billions/.
5 RCP refers to Representative Concentration Pathway, a standard for modeling future climate scenarios of greenhouse gas concentration in the atmosphere. RCP 8.5 represents an extreme case scenario. See this Intergovernmental Panel on Climate Change (IPCC) glossary for more detail.
6 For more discussion on this trend, see our recent ISA Briefing, US migration trends and (U)rbanization.
7 Cross-sectional correlation between the LaSalle current climate risk index and the population change in the top 45 US metro areas between December 2018 and December 2023.
8 Cross-sectional correlation between the LaSalle future climate risk index and population change in the top 45 US metro areas between December 2023 and December 2028 based on Moody’s forecast as of February 2024.
9 Source: LaSalle analysis of data from NCREIF, FEMA.
10 Source: LaSalle analysis of data from NCREIF, FEMA.
11 Source: LaSalle analysis of MSCI data.
12 Source: The Dutch experience in flood management: A history of institutional learning
13 Source: The devastating storm of 1953, The History Press
14 Source: Dutch primary flood defenses, Nationaal Georegister
15 See Delta Programme 2024
16 See Osaka city – Flood disaster prevention map outline from the Osaka City Office of Emergency Management.
17 Estimates of maximum flood depth are based on historical records of natural disasters such as earthquakes, river floods and tsunamis that have occurred as reported by Japan’s Ministry of Land, Infrastructure and Tourism.
18 A superficial view of markets is that transactions are based on agreement on value. More accurately, buyers and sellers agree on a price, but their willingness to transact is based on disagreement on value. A seller, for example, may have a less bullish view on NOI growth prospects than a buyer. We expect the same disagreement on climate-related risk/reward trade-offs to be increasingly important.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Report Summary: Physical climate risk data can be a powerful tool for managing asset and portfolio risk and returns. Learn what strategies leading firms are using to manage physical climate risks and navigate market challenges. The latest report from the Urban Land Institute and LaSalle Investment Management builds on their previous report, How to Choose, Use, and Better Understand Climate Risk Analytics, to describe how leading firms are leveraging physical climate-risk data in underwriting practices. With insight into asset- and portfolio-level risk becoming increasingly easy to obtain, new challenges lie in effective interpretation and integration of information into investment practices. Relying on research and interviews with industry leaders, this report provides a nuanced exploration of this emergent issue.
Physical Climate Risks and Underwriting Practices in Assets and Portfolios is structured into three sections, each addressing different aspects of the industry’s response to climate-risk data:
Section 1. Explore the current state of the industry, finding that:
• Leading firms actively coach their teams on physical risk.
• Regulatory trends affect, but do not motivate physical risk assessment.
• Different geographies approach physical with their own level of urgency.
• Investment managers tend to focus on fund risk, capital providers on portfolio risk.
• Tools to understand and price physical risk are still in a nascent stage of development.
Section 2. Examines the application of climate data in decision making. Key findings include:
• Aggregate physical risk is a screening tool; individual hazard risk is actionable information.
• Climate value at risk remains opaque; the utility of the single number offers value but needs increased transparency.
• Atypical hazard risk (e.g., flood in a desert) merits increased attention.
• External consultants can frequently fill skill gaps, especially for firms with less in-house expertise.
• While no predominant timeframe or Representative Concentration Pathway (RCP) emerged as industry standard, the 2030 and 2050 benchmarks were the most commonly referenced time horizon.
Section 3. Assess the impact of physical climate risk on acquisition, underwriting, and disposition practices; finding that:
• Leading firms start with a top-down assessment of physical risk.
• Market concentration of physical risk is analogous to other concentration risks—a nuanced analysis is required.
• Capital expenditure for resilience projections is a key forecast but rife with uncertainty.
• Local-market climate mitigation measures are important to understand but difficult to forecast.
• Exit cap rate discount for estimated physical risk is an increasingly commonly used tool, frequently 25 to 50 basis points.
• Firms infrequently disclose physical risk but the market needs increased transparency.
Important Notice and Disclaimer
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Washington / New York (April 11, 2024) – A new global report from the Urban Land Institute (ULI) and LaSalle Investment Management (LaSalle), a leading real estate investment management firm, offers a new framework to help the real estate industry act on climate risk disclosure data. Across the real estate industry, practitioners understand physical climate risk to assets and portfolios poses a financial risk, but there are still many challenges to enacting on the data being collected and disclosed.
This new framework is the latest tool for real estate investors and other practitioners to evaluate the costs of action and inaction when it comes to investing in resilience. The report, Physical Climate Risks and Underwriting Practices in Assets and Portfolios, is the second in a series by ULI and LaSalle. Building on the first report that outlined how to source and interpret reliable climate risk data, the second provides a market overview, adaptable framework, and recommendations based on emerging best practices for incorporating physical climate risk in the underwriting process.
“Physical climate risk data collection and disclosure is the first step the real estate industry can take to further invest in and build resilient infrastructure,” said Lindsay Brugger, head of Urban Resilience at ULI. “Data drives action and doing nothing incurs deeper costs — from higher insurance premiums to asset repair or replacement. Focusing on the underwriting process, the framework offers investment managers a methodology for developing risk-adjusted returns so deals can be adapted in alignment with a firm’s fund or portfolio objectives.”
“Of the $850 billion of commercial real estate tracked by NPI, LaSalle estimates $285 billion, or 34% is situated in high and medium-high climate risk zones in the US,” said Julie Manning, Global Head of Climate and Carbon at LaSalle Investment Management. “This report helps provide guidance that investment managers can follow to factor the climate risk data they have available to them and improve outcomes at the asset and portfolio level. We want to lead the conversation across the industry and collaborating with ULI is a great conduit to amplify the discussion that will ultimately benefit investors of all kinds with more resilient real estate portfolios.”
The framework is broken down into three steps for decision making based on individual asset risks, local market risks, and ongoing risk mitigation efforts:
1. Evaluate the level of exposure to physical climate risk and financial implications;
2. Identify hazard mitigation strategies and estimate associated costs; and
3. Determine risk-adjusted return and whether or not that return meets firm objectives
The redevelopment will also look to meet future tenant requirements and evolving work trends with high-quality amenities to promote in-person interaction and facilitate a hybrid working, including an auditorium, business centre, bars and restaurants, event spaces and a media broadcast studio.
As climate impacts continue to influence real estate markets around the world, improving understanding of physical climate risk and adjusting pricing to reflect risk are growing imperatives. Firms can better navigate the complexities of physical climate risk and capitalize on emerging opportunities by leveraging this new report’s insights and guidance. Prioritizing knowledge diffusion and empowering informed decision-making processes is key to effectively managing and mitigating incoming climate risks in the evolving real estate industry, whether at a community or individual building scale.
The full report and downloadable framework can be found on ULI’s Knowledge Finder.
REPORTERS AND EDITORS: For more information, please contact:
ULI
LaSalle
Drew McNeill
About the Urban Land Institute
The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to shape the future of the built environment for transformative impact in communities worldwide. Established in 1936, the institute has more than 48,000 members worldwide representing all aspects of land use and development disciplines. For more information on ULI, please visit uli.org, or follow us on Twitter, Facebook, LinkedIn, and Instagram.
About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages over US $89 billion of assets in private and public real estate equity and debt investments as of Q4 2023. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. For more information please visit www.lasalle.com, and LinkedIn.
Roughly 60% of the world’s population lives in countries facing major elections in 2024, markets representing 65% of the institutional investable real estate universe.1 Elections are, of course, the cornerstone of the democratic process, which in turn underpins the appeal of the most transparent, investable markets; that said, elections come with the possibility of policy changes that may impact returns. Today’s geopolitical risks, whether they be this continuing election super-cycle (see LaSalle Macro Quarterly, or LMQ, page 4), or the various ongoing conflicts and trade disruptions, prompt important questions about how to manage investment risks related to these themes.
One of the protagonists in the Oscar-winning film Everything Everywhere All at Once says that being “’right’ is a small box invented by people who are afraid.” LaSalle’s risk management philosophy emphasizes optimizing risk/return trade-offs rather than minimizing risk-taking, while recognizing the limitations of point-estimate predictions and base-case scenarios — that is, attempts at “being right.” Today’s geopolitical events are especially likely to confound any forecaster seeking to be exactly right.
How should an investor manage their assets in the context of “unknowables” about which engaging in guesswork is tempting, but being “right” is elusive? What frameworks do we have to mitigate geopolitical risks? We propose six recommendations to keep in mind for investors taking stock of the many elections, and several conflicts, that may impact markets in 2024.
There are many examples of ex ante predictions of elections’ investment implications having been overstated. For instance, leading up to the 2016 US presidential election, there were widespread predictions that the US economy would be significantly negatively impacted by Donald Trump’s anti-immigration and protectionist stance were he elected.2 In the event, equity markets rebounded strongly after a short-lived hit and the US economy proved resilient to the changes in rhetoric and policy that came with a new president.3
Looking ahead to the US elections later this year, almost certainly a rematch between Biden and Trump, coverage of the candidates’ differences should be accompanied by awareness of their similarities. Both candidates seek to prioritize domestic production, which could lead to greater levels of on- or near-shoring of supply chains.4 Moreover, election prediction odds (see LMQ page 6) suggest divided control of the two houses of Congress and the presidency is likely; divided government has typically been associated with relative stability in domestic policy, which is generally positive for markets.5 Both of these factors — at least in isolation — point to the potential for news cycle hype to overstate long-term market impacts of this particular election.
Financial theory tells us that systematic risks are undiversifiable.6 Systematic factors are those with significant, far-reaching implications that affect the price of all assets. But financial theory also entertains that different assets may have different sensitivities to the same set of factors; an asset’s “beta” signifies the responsiveness of its price to a given factor. This is a useful way to think about an investment’s sensitivity to political and geopolitical events. For example, a property in a metro area whose economy is heavily driven by government spending would likely have a high sensitivity to political changes. Another example could be that a property located in the Baltic States, ex-Soviet countries on the border with Russia, is likely to be especially sensitive to developments concerning relations between Russia and the West. Investors should be mindful of assets’ expected sensitivities to geopolitics, whether assessed empirically or, as is more often the case given a lack of data, estimated through intuition.
Systemic risks go beyond systematic factors; they involve severe shocks that have the potential to re-align entire markets in unpredictable ways. An example of such an extreme event is the remote but non-negligible potential that today’s so-called “proxy wars”7 escalate into a broader active conflict between great powers.8 The challenge of incorporating such eventualities into investment decision making is not only estimating appropriate probabilities that such events may occur, but establishing ideal strategic responses should they do so. Catastrophic shocks are exceedingly rare and have the potential to create winners and losers in asset markets that are difficult or impossible to predict.9 It may be more fruitful for investors to focus on more incremental — and more likely — eventualities that have the added benefit of being easier to model.
Media coverage naturally tends to focus on the national and trans-national arenas, but local political developments can be especially impactful for real estate investments. Such issues can fly under the radar, especially given many of the most relevant ones are only of interest to a specialist audience. For example, changes in policy around topics like the planning process, property taxes and transfer taxes (a.k.a. stamp duty) can have direct, measurable and immediate impacts on property cash flows and thus values. The distraction of the bright shiny lights of global geopolitics should not be allowed to excessively overshadow the critical local issues that impact real estate.
To a certain extent, political risks can be managed through diversification. This is especially true when they involve isolated events that impact one country or subnational division such as a specific city, province or state. But often political events are part of a broader arc with potentially far-reaching consequences. A smattering of small seeds can grow from obscurity into a thicket. Nothing illustrates this better than the rise of populism, nationalism and protectionism around the world, themes set to dominate elections this year and beyond. The very notion of “globalized nationalism” may sound like an oxymoron, but it has become a fact.10 While diversification is an essential portfolio construction concept that helps manage many types of risk, including political risk, care must be taken to recognize when what may appear to be “specific” risks are part of a broader pattern that is difficult to “diversify away.”
Geopolitical and political risks are difficult to incorporate into traditional financial analysis. We find that thinking through scenarios can be helpful in identifying investment themes that may emerge from geopolitical trends. These can point to strategies to avoid — as well as potential new ones to pursue. The “Looking Ahead” section of this note expands on some of the key themes we have been tracking.
As geopolitical events are difficult to control and plan for, one may conclude, similarly to that same protagonist in the Everything Everywhere film, that “nothing matters.” But uncertainty is no excuse for ignoring geopolitical risks. We do stop short of directly feeding geopolitical themes into our formal risk management program, where the focus is on the specific risks that can actively be managed for our clients.11 However, it remains important to observe and understand macro conditions from a holistic perspective. The work done in our regional research teams — particularly that focused on capital markets, the signals that foreshadow potential inflection points and the local political themes that impact real estate — is critical to this effort.
We have argued that political and geopolitical risks are difficult to incorporate into investment processes, but that considering “what ifs” can be useful in uncovering relevant investment themes. Below are three potential real estate implications of the current geopolitical backdrop that we are monitoring today:
Footnotes
1 LaSalle analysis of data from Time and our proprietary investable universe estimates. See LMQ page 5 for more detail.
2 Sources: “What do financial markets think of the 2016 election?” Brookings Institution paper, Wolfers and Zitzewitz, 2016. The article predicted that “a Trump victory would trigger an 8-10% sell-off”. See also “The Consequences of a Trump Shock,” a Project Syndicate article by Simon Johnson, 2016. He predicted Trump’s election would “likely cause the stock market to crash and plunge the world into recession.”
3 On the news of the 2016 election result, Standard & Poor’s 500-stock index initially fell 5% but ended the day up more than 1%, according to Refinitiv. The US avoided a recession until the emergence of the COVID-19 pandemic, according to Oxford Economics.
4 Source: “Biden vs Trump: Key policy implications of either presidency,” Economist Intelligence Unit, 2023.
5 Sources: “What to Expect From Divided Government.” PIMCO article, Cantrill, 2022. According to the article, “the equity markets historically have tended to do well in years of split government.”
6 Source: The Handbook of Risk Management: Implementing a Post-Crisis Corporate Culture. P. Carrel, 2012. “Systematic or market risk refers to the inherent danger present throughout the entire market that cannot be mitigated by diversifying your portfolio. Broad market risks include recessions, periods of economic weakness, wars, rising or stagnating interest rates, fluctuations in currencies or commodity prices, and other ‘big-picture’ issues like climate change. Systematic risk is embedded in the market’s overall performance and cannot be eliminated simply by diversifying assets.”
7 According to the Oxford Dictionary, “proxy wars are the replacement for states and non-state actors seeking to further their own strategic goals yet at the same time avoid engaging in direct, costly, warfare.” Various observers have argued that the Russia-Ukraine and Israel-Gaza conflicts are proxy wars. For example, see “IKs the ware in Ukraine a proxy conflict?” Kings College London report, Hugues (2022).
8 According to a research brief by RAND: “Great power wars — conflicts that involve two or more of the most powerful states in the international system. These have historically been among the most consequential international events.”
9 Source: “What a third world war would mean for investors,” The Economist, 2023. The article highlights the virtual impossibility of positioning an investment portfolio to outperform through prior world wars, even if the investor had correctly predicted that these conflicts would occur.
10 For further discussion of the global spread of nationalism, see “How cynical leaders are whipping up nationalism to win and abuse power”, The Economist, 2023; “Demonizing nationalist parties has not stemmed their rise in Europe,” The Economist, 2022; “The new nationalism,” The Economist, 2016.
11 We do, however, utilize tools that correlate to geopolitical risk. For example, the JLL Global Real Estate Transparency Index (GRETI) supports our monitoring of evolving investment conditions around the globe. Whilst the model does not explicitly consider political risk, the two are inexplicably linked through the inclusion of a number of governance and regulation data points.
12 Source: “A global economic policy uncertainty index from principal component analysis,” Finance Research Letters, Peng-Fei Dai, 2019.
13 Source: “What are the impacts of the Red Sea shipping crisis,” J.P. Morgan, 2024.
14 Source: “The Great Rewiring: How Global Supply Chains Are Reacting to Today’s Geopolitics,” Center for Strategic & International Studies, 2022.
15 Sources: “The business costs of supply chain disruption,” Economist Intelligence Unit, 2021 and “Why Deglobalization Makes US Inflation Worse,” Project Syndicate, Moyo, 2022.
This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.
LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.
By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.
Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.
Kyung Bae Park joined LaSalle in January 2024 as a Senior Vice President in the Investor Relations team, based in Seoul. He is responsible for building and maintaining relationships with Korean clients.
Kyung Bae brings over 15 years of investment experience to LaSalle. Prior to joining the firm, he worked for Vestas Investment Management, Korean AMC, where he was responsible for deal sourcing, fundraising, and deal execution for its overseas investment division. Before that, Kyung Bae was involved in equity analysis, marketing, and institutional sales at Allianz Global Investors.
Kyung Bae is an alumnus of the London School of Economics and Political Science, where he pursued an Master of Science in Economics, as well as the University of Warwick, where he obtained a Bachelor of Science in Industrial Economics. He is a certified investment manager in Korea.
Managing Director, Investor Relations
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Head of Global Direct Investments
Managing Director, Investor Relations
Global Head of Investor Relations
Managing Director, Investor Relations
Managing Director, Investor Relations
Head of Americas Investor and Consultant Relations
